CashVille

I attended the NY Games Conference on Wednesday and like all conferences I've attended of late there was one thing on everyone's minds and lips - the phenomenon of social games. By the way, the term "social games" is the politically correct way of defining this so we don't have to hurt MySpace, Hi5 and Bebo's feelings. We all know that it's Facebook that's driving this.

Facebook games came on the scene approximately a year and half ago and have very quickly become the 800 pound gorilla of online gaming. Small-ish first movers who understood social and how to design for it made monster companies while the old guard stood by with their jaws dragging on the floor. Zynga, Playfish and Playdom have seemingly come out of nowhere to become instantly relevant and profitable. With upwards of 100 million monthly active users playing their games, and game plays in the billions per month, no one can deny that social games companies are the new darlings of the entertainment world.

So is it for good reason that social games companies have this cache? At this year's Casual Connect conference, Sebastien de Halleux, the chief operating officer for Playfish, claimed that social games had a current market size between $500 million and $1 billion which was likely to increase to $10 billion in the next few years. At yesterday's conference, de Halleux went on to further claim that because social games depend on the viral elements intrinsic to Facebook for their distribution, the marketing costs to establish a new game are relatively insignificant.

So we potentially have a multi-billion dollar industry with an active player base that's roughly one third the size of the country with seemingly no marketing expenses. Where's the catch? That's exactly what I asked the panelists on the viral gaming session, which included de Halleux and Vish Makhijani the COO of Zynga. Both claimed one of the most difficult aspects of their business is maintaining the massive backend infrastructure that goes into supporting such a huge player base. When traditional games are launched the development ends but for social games it's when development really kicks in. Servicing hundreds of millions of customers a month is no easy feat. Creating and selling new items, introducing new features and providing support takes hundreds of dedicated employees.

That's what they admitted; here's what I think they're hiding:

First, marketing these games is hardly as cheap as they would have you believe. There are now more than 5,000 games to choose from on Facebook with more competitors entering the arena every day. Zynga has a huge advantage in that they can drive players of their current games to their new games and yet CEO Mark Pincus had no problem admitting to Silicon Alley Insider that the Company spent "a couple million dollars" advertising FarmVille. With Inside Social Games further reporting (though unconfirmed) that Zynga will spend up to $50 million on Facebook advertising this year. Hardly insignificant.

Second, the insane amount of monthly active players is not as large as they would have you believe. The coveted monthly active player stat is calculated in aggregate. So in other words if I play "Restaurant City," "Who has the Biggest Brain?," and "Pet Society" all from Playfish, I'm considered to be three monthly active players by Playfish.

Lastly let's take a look at revenue. Right now the big social game companies are making the majority of their cash through offers. So you sell your soul to Netflix or take a quiz and reveal all of your personal information and you'll get some virtual currency in the game you're playing. I find this to be one of the most interesting and least understood aspects of this business and one that simply cannot last in its current state.

My points aside, these are still astounding businesses that are by all accounts profitable and seemingly unstoppable. If they have so much going for them, why is everyone afraid to point out the weak spots?